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EMI

  • What is EMI?
  • What is the EMI formula?
  • How to do EMI calculation? Give an example.

What is EMI?

EMI stands for "Equated Monthly Installment." It is a fixed payment amount made by a borrower to a lender at a specified date each month. EMI consists of two components - the principal amount and the interest charged on the principal, which is repaid over a predetermined period. It is a popular mode of repayment for various types of loans, including home loans, personal loans, and car loans.

EMI is a popular mode of repayment because it provides borrowers with a clear understanding of their monthly repayment obligations, making it easier to budget and plan for expenses. It is also beneficial for lenders as it provides a regular income stream and helps reduce the risk of default.

What is the EMI formula?

The formula to calculate EMI (Equated Monthly Installment) is as follows:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

where:

P = Principal or loan amount

R = Rate of interest per month (annual rate divided by 12)

N = Loan tenure in months

This formula is used to calculate the fixed monthly payment that a borrower has to make to repay a loan over a specified period of time. The EMI amount is calculated by dividing the total amount payable (including both the principal amount and the interest) by the number of months in the loan tenure.

How to do EMI calculation? Give an example.

BSuppose a borrower takes out a loan, and the lender calculates the EMI amount based on the loan amount, interest rate, and loan tenure. The borrower then makes monthly payments of the EMI amount for the entire loan tenure until the loan is fully repaid. The EMI amount remains constant throughout the repayment period, but the proportion of the principal and interest components changes over time.

For example, if a borrower takes out a home loan of Rs. 50 lakhs at an interest rate of 8% per annum for a tenure of 20 years, the lender will calculate the EMI amount to be paid every month. Let's assume the EMI amount is Rs. 43,870. Over time, the proportion of the principal and interest components in the EMI payment will change - at the beginning of the loan tenure, the interest component will be higher, while the principal component will be lower. Then, as the loan tenure progresses, the interest component decreases, and the principal component increases until the loan is fully repaid.